They’ve been sold to the Chinese middle class — the peasants aren’t buying any, and the billionaires are smart enough to buy gold and get it out of the country.

The Chinese middle class buy the WMPs from banks but they’re not guaranteed by the banks — and they are starting to default.

The WMPs are junk CDOs and there’s nothing behind them — they’ll never be able to be paid off.

SHADOW BANKING IN CHINA

There’s also the issue of corporations lending to corporations. There’s more money in the shadow banking system every day and no one knows exactly how much, but it’s in the trillions of dollars.

The WMP have been sold, we don’t know what the corporate-to-corporate lending is, we don’t know what the provincial debt is — some is regular debt and some is ‘vendor financing’ (“I owe you money but I don’t pay you”).

So there’s a pyramid of bad claims in China. They’ve got a lid on it for now and maybe they will for a little while longer.

INVESTING IN CHINA

The way to get exposure in China is to buy a good U.S. company that knows its way around China. Jim says IBM is a good example.

IBM is one of the few companies where China needs them more than they need China. They have a close relationship so it’s good way to participate in Chinese growth without putting your money in China.